Netflix stock lost over 11% of its value late today after the company reported second quarter results that underwhelmed Wall Street, including a surprising loss of 130,000 U.S. customers that left the streaming service during the last three months.

Netflix added 2.7 million customers in the second quarter, a much smaller number than the 6 million it added during the same period last year. As of the end of June, Netflix now has 151.6 million customers worldwide. Wall Street expected between 153-156 million by that time. The $2/month U.S. rate increase during the first quarter for Netflix’s popular two-concurrent stream plan (was $10.99, now $12.99 in the U.S.) helped keep company revenue up 26%, to $4.92 billion for the quarter. But analysts expected $4.93 billion. Profits also declined to $270 million, compared with $384 million a year ago during the same quarter.

The company blamed the lackluster results on the lack of compelling content during the second quarter. In a letter to shareholders, Netflix claimed the recent price increase slowed growth, but the real problem was overheated growth during the first quarter and not a lot of blockbuster movies and shows to watch.

“We think [the second quarter’s] content slate drove less growth in paid net adds than we anticipated,” Netflix executives said.

The company also noted it is raising prices in several European countries including the United Kingdom, Spain, Ireland, France and Germany.

Netflix does not believe competition with other streaming services had a material impact on its subscriber numbers during the quarter, but analysts suggest Netflix should be concerned about forthcoming streaming competition from AT&T/WarnerMedia (HBO Max) and Walt Disney (Disney+). As more services become available, consumers are likely to take a hard look at the streaming services they are watching and ditch those they are not.

Netflix also declared it will not introduce a cheaper, ad-supported version, despite increasing speculation it would.

“We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.” Netflix told shareholders.

The Wall Street Journal reviews the many challenges to Netflix from forthcoming contenders in the streaming wars. (4:36)

While net neutrality in the United States has been neutered by the Republican-controlled FCC, the concept of an online level playing field is alive and well in Germany, and T-Mobile’s parent company Deutsche Telekom (DT) just got called out for a foul ball.

The German telecom giant has lost its legal battle with Germany’s telecom regulator, the Federal Network Agency (Regulator Bundesnetzagentur) over StreamOn, its all-you-can-stream mobile video product that does not count against customer usage allowances. The company introduced the unlimited video streaming service in Germany in 2017, emulating a similar service available in the United States that offers zero rated mobile video content at a reduced video resolution. An appeals court in Münster this week ruled that the German regulator was correct to forbid DT from continuing to offer StreamOn to customers in its present form for two reasons:

• StreamOn was only available to T-Mobile customers inside Germany or those who visited the country, violating Europe’s “roam like at home” rules that require carriers to not restrict or charge more for mobile services or features when traveling between member states of the European Union.
• StreamOn violates German net neutrality rules by delivering only T-Mobile approved, speed-throttled, low resolution video content that won’t count against a customer’s usage cap.

“StreamOn must conform to the ‘roam like at home’ principle and customers must have video streaming available in an unthrottled bandwidth,” said Federal Network Agency president Jochen Homann. “The rule of equal treatment is a cornerstone of European net neutrality regulations. The principle of equal treatment has made the internet a driver of innovation, and the diversity of applications and services benefits all consumers.”

Hohmann

DT immediately contested the regulator’s decision and sued. The case has been drifting through German courts since December 2017, with the most recent ruling in favor of the regulator issued by an appeals court, which declared its ruling to be final.

DT has claimed it finds the regulator’s objections “very puzzling indeed,” claiming StreamOn has been wildly popular in the United States and Germany. Two years ago, it warned that if the courts upheld the regulator’s ruling, it would force the company to stop offering it.

“The Bonn-based regulatory authority is ordering us to also offer StreamOn in other EU countries. It bases this order on the EU Roaming Regulation,” DT said in a statement in 2017. “Fulfilling the order would mean the end of our free service, because we would not be able to offer it cost-effectively in other countries.”

Despite its threat to shutter StreamOn in Germany, the company claimed this week it would continue offering the service for the time being, without increasing prices.

“We are delighted that the court has confirmed our interpretation of the law,” a Federal Network Agency spokesman said after the decision was announced. “We will take quick action to ensure that Telekom adjusts its product accordingly.”

“We expect the [Federal Network Agency] to allow an appropriate amount of time to make the necessary adjustments,” a DT spokesman said. “We are convinced that StreamOn is a legal product and will explore all our legal options.”

Comcast premium subscribers began seeing Cinemax dropped from their lineup this morning, replaced with Comcast’s own premium movie network Hitz.

The cable company announced back in May it was replacing AT&T/WarnerMedia-owned Cinemax with its own movie channel beginning this summer. Summer has arrived.

Hitz will save Comcast an undisclosed amount of money over what AT&T was charging the cable operator for the lesser-watched cousin of HBO. Cinemax was launched in 1980 to focus on movies, and so will Hitz. Comcast says its new movie channel will feature at least 200 major movie titles, all available on-demand, with fewer HBO also-rans. Linear TV viewers will see at least three versions of Hitz on their lineup, replacing five Cinemax networks. They are dubbed Hitz, Hitz2 and Hitz3. The new movie channel is included in XFINITY Premier, Super and certain other TV packages.

Cinemax fans who want the channel back will still be able to subscribe, but only on an a-la-carte basis for $12/month.

Comcast offers this FAQ:

What is Hitz?
Hitz is a new on-demand movie service that includes more than 200 titles from a variety of top studios. This selection will rotate over time.

Where can I find Hitz?
The easiest way to find Hitz is by saying “Hitz” into your X1 Voice Remote. Hitz can also be found in the Networks section of the On Demand menu. You can also see current Hitz movies in the On-Screen Guide – frequently near other movie services.

Why are you doing this?
Most of the movies on Cinemax also air on HBO. By offering Hitz instead, we’re delivering customers a better variety of content.

How can I watch Cinemax original content?
While Cinemax is no longer included in the adjusted packages, it is still available to purchase on its own for $12 per month.

Should I pay a different price now that I am no longer receiving Cinemax?
While Cinemax is no longer included in these packages, we believe the new lineup offers a better value. Most of the movies on Cinemax have also aired on HBO. By offering Hitz instead, we’re delivering a better variety of content.

Could this be the Netflix of the future?

Investors concerned about the increasing costs of developing new original content for Netflix have caused a drumbeat for the world’s largest on-demand video streaming company to start running advertising inside TV shows and movies.

A new study finds that almost one-third of Netflix customers claim they would not mind seeing advertising if it meant paying a lower price for Netflix.

The Diffusion Group, based in Los Angeles, asked 1,292 current Netflix subscribers if they would switch to a new, lower-priced Netflix tier that included commercial advertising. Nearly 32% of respondents expressed confidence they would make that switch, with 49% opposed and 20% undecided.

A recent streaming conference in Europe seems to have stoked interest in the concept of an ad-supported Netflix, although the company has repeatedly claimed it has no plans for an advertiser-supported tier, dismissing the idea as a concept dreamed up by their competitors, notably Comcast/NBC and Hulu.

TDG Research president Michael Greeson believes advertising on Netflix is inevitable however, driven by a backlash from Wall Street over how much Netflix is spending on content as it continues to lose access to some of its most popular licensed content, being pulled off Netflix by its competitors Disney and AT&T/WarnerMedia.

“Given the rising costs of programming and growing debt, so goes the argument, it is just a matter of time before the company makes a move,” TDG said in its report.

Netflix’s early days of streaming depended on a deep library of popular movies and TV shows that were readily licensed to the company by major Hollywood studios. But in the last five years, those studios have demanded dramatically higher licensing fees, and in the last year they have ended some contract renewals altogether to reserve content for the launch of their own affiliated streaming services, including Disney+ and HBO Max.

“Netflix’s response to its thinning third-party library is to spend more on originals, which it’s gambling will keep subscribers from jumping ship,” Greeson said. “But with half or more of its most-viewed shows being owned by three studios, each of which is launching their own direct-to-consumer services, how long can you convince 55+ million US consumers that your service is worth paying a premium price, especially compared with Hulu (offers an ad-based option), Amazon Prime Video (free with Prime), and Disney+ (coming in a $6.99/month)?”

Greeson

Netflix has faced growing pressure from investors to reduce the level of debt it has accumulated financing those original productions, including pushes for rate increases and advertising. Netflix raised prices, but has publicly opposed advertising. Some investors now want another rate increase, which Greeson warns would be perilous for Netflix’s subscriber count, because their research found the last price increase “strained the limit of the service’s value.” That research was done before subscribers start to discover their favorite shows will increasingly be pulled off the platform. Greeson believes another rate increase will cause at least some customers to flee, stalling Netflix’s growth.

The happy medium in Greeson’s view is the introduction of an ad-supported tier for price-sensitive subscribers, and he predicts Netflix will introduce it in the next 18 months.

“Ads will become an important part of a comprehensive tiering strategy that helps bullet-proof Netflix for years to come,” Greeson said.